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The use of the spreadsheet to fill out and submit employee expenses is as old as the day that the Excel software and other similar ones (e.g. Lotus 1-2-3, VisiCalc) were put on the market in the 80’s. A few simple formulas on one tab, a minimum description, stapling receipts in the back, and the expense report is ready to be sent to the supervisor for review.

We have to keep in mind that whatever tool is used to fill out and submit an employee expense report, either a spreadsheet or an employee expense software, it has to be practical. For instance in its design, it has to take into account the chart of account of the organization, its internal policies, and all the tax rules. It should include invoices to back up a refund claim, and an area to allow the employee to insert some explanations.
When organizations are expanding their operations, adding internal policies, and when the regulatory environment is more complex than ever, such as the current rules governing the GST, HST & QST, handling the traditional spreadsheet while attempting to remain efficient can be rather challenging. Here is a list of nine factors to take into consideration:

1) Employees Expenses; not your Typical Supplier
Although it is common to have an approval process for a given trip that an employee will participate in, it is rare that there is an approval process for the selection of each supplier during the trip. The suppliers’ selections by employees are not your typical suppliers; employees have some latitude in the selection of their suppliers. The documentation supporting those expenses such as parking, tolls, purchases over the internet, may not always be at its best. In the case of allowances, such as KM, meals and clothing, there is simply no documentation since the nature of an allowance is that it replaces an expense receipt or a series of expenses in the case of KM allowance.

2) Allocating Expenses Incurred by Employees to a Project
It is common to encounter organizations that have to allocate some expenses incurred by employees to a given project. An organisation may want to control costs relating to a given activity, or it may have to charge back some expenses incurred by employees to clients.

3) Allocating Expenses to the Chart of Account
Identifying every accounts for a given expense for an employee is not that easy when the Excel Spreadsheet is “one size fits all”.
In several organizations, there is an account segment that relates to a division that an employee is working for. Others have to assign expenses to a cost center.

4) Ratio of Travel Expenses over All Expenses
In a typical company, travel expenses represent 10% of all expenditures. We are not dealing with an expenditure that is insignificant. So a proper management of those expenses is required in order to ensure the reporting is adequate, the GST, the HST and QST are fully recovered, the organization’s policies are respected and expenses are not reimbursed twice.

5) Volume of Employee Expenses Reports
The fact that an employee expense system is managed by a spreadsheet, may be fine in situations where the volume of expense reports submitted by employees is low. But as soon as the volume of expense reports increases, the lack of a central database to provide an insight into spending is problematic.

6) The GST-HST & QST Rules are Numerous and Changing
Technically there could be as many tax rates as there are provinces in Canada. In that respect; it is a moving target. In 2016, three provinces changed their HST rate. As for the tax rules; they are rather numerous and of course they also change periodically. Currently in Ontario, the HST is at a rate of 13%, yet for large businesses, the recapture rate on input tax credit on the provincial portion of the HST on expenses such as meals will be lowered on July 1, 2017 to 25%. If you take into consideration all the various rates across the country and all the different rules, this is an area where the Excel spreadsheet, may not be the most efficient tool. Since GST, HST & QST are by and large, recoverable taxes, not having a good employee expense system can result in a loss.

7) Mismanagement of GST/HST & QST on Employee Expense may Represent a Significant Cost
It is important to properly manage recoverable taxes since they are an asset that can be materialised if the tax rules are followed. It is common to encounter tax registrants who got GST/HST QST significant assessments on employee expenses, even in the six digits, due to the difficulties to manage these rules in regards to the limitation of their spreadsheet.

8) Rectifying an Excel Spreadsheet may be a Time Consuming Process
To modify a value on an expense report stored on a server in the cloud is easy. You only need an internet access, and the value that is on a centralized database can be modified for all (e.g. the employee, the supervisor and the accounting department). But to modify a template when it is sent back and forth by e-mail or by internal mail between an employee, the accounting department and the supervisor, is just not efficient. Keeping track of the different versions on a given expense report can be a challenge, and may lead to errors. Different studies abound to quantify the time loss on managing the manual employee expense process.

9) Old Versions of the Employee Expense Template Still Used?
Any changes to an Excel Spreadsheet, due for instance to new projects, new divisions, new tax rules, may results in errors resulting from having multiple employee expense template versions available in an organization. This is one of the several issues of not having all the employee expense located on a centralized database.

CONCLUSION
With a significant volume of employee expense reports, and dealing with the complexity of the structure of a chart of account, changing Canadian sales tax rules, the policies of an organization, then the spreadsheet limitations can be costly for your organization.

The Canada Revenue Agency released in June 2015 the GST/HST Info Sheet GI-171, “Phasing out of Recaptured Input Tax Credits in Ontario”. The info sheet explains how the reporting have to be done within CRA GST/HST Netfile login page for large businesses effective for reporting periods starting on July 1, 2015. For periods before July 1, 2015 and after June 2010, the recapture rate is 100%. For periods starting on July 1, 2015 end ending on June 30 , 2016, the recapture rate is at 75%. For reporting periods starting on July 1, 2016 and ending in June 2017, the recapture rate is 50%.Simulation of this calculation can be performed at https://www.advataxes.ca/en/tax-calculator-for-travel-expenses.aspx for recapture rates applicable on the day the test is performed.
The following are two examples for the 50% recapture rate for two specified properties and services: cell phone monthly charges and meals & entertainment, incurred and reimbursed in July 2016. The profile setting within Advataxes for this corporation is a ratio of commercial activities of 100% and of course; “large businesses” for the GST status. The expense before HST in both cases is $100, so there is $13 of HST paid in both instances.

For the above example and for expenses in periods starting in July 2016 and ending in June 2017 the RITC for the meal expense would be:
$4 × 50% = $2
The net meal expense would be $108.50.
For the period of July 2016 to June 2017 in the above example the RITC for the cell phone monthly would be:
$8 × 50% = $4
The net cell phone expense would be $104.
So the bottom line is more revenue for large businesses on specified properties and services incurred in Ontario starting on July 1, 2016.
GST/HST Netfile requires that you input the recapture of input tax credits on the line for “Ontario 50%” so it will calculate the effective RITC amount to be remitted to the CRA. The recapture rate is scheduled to be further reduced in Ontario, so it should be eliminated by 2018. To some extent, similar rules exist in Prince Edward Island for the HST and in Quebec for the QST.

The Canada Revenue Agency released earlier this week the GST/HST info Sheet GI-171 entitled “Phasing out of Recaptured Input Tax Credits in Ontario”. The info sheet explains how the reporting will have to be done within CRA GST/HST Netfile login page for large businesses effective for reporting periods starting on July 1, 2015. From July 1, 2015 to June 2016, the recapture rate will be at 75% . For period before July 1, 2015 and after June 2010, the recapture rate is 100%.
The following are 2 examples for the 100% recapture rate for 2 specified properties and services; cell phone monthly charges and meals & entertainment, incurred and reimbursed in June 2015. The profile setting within Advataxes for this corporation is a ratio of commercial activities of 100% and of course; “large businesses”. The expense before HST in both cases is 100$, so 13$ of HST paid in both cases.

For the period of July 2015 to June 2016 in the above example the cell phone monthly charge RITC would be:
$8 times 75% that would equal $6. The cell phone expense would be $106.

For the period of July 2015 to June 2016 in the above example the RITC for the meal expense would be:
$4 times 75% that would equal $3. The net meal expense would be $109.50.

So the bottom line is more revenue for large businesses on specified properties and services incurred in Ontario.

GST/HST Netfile requires that you input the recapture of input tax credits, on the line for “Ontario 75%” so it will calculate the effective RITC amount to be remitted to the CRA
The recapture rate is scheduled to be furthered reduced in Ontario, so it should be eliminated by 2018. Similar complexities exist for PEI and Quebec and will be discussed separately

For employee expenses a choice has to be made between the exact method and the factors method for GST-HST & QST purposes.

Actually there is even a wider selection since the factors method may be used only on a limited numbers of expense categories. It is common to encounter organizations using the exact method for air fare and the factor method for all other expense categories. Also there is no such thing as using the factors method on allowances, the factors method can only be used on reimbursement of expenses not on allowances paid to employees, partners or volunteers. Finally for large organizations, the recapture of input tax credits in Ontario and PEI has to be calculated using the exact method, even if the factors method is used on expense categories covered by the restrictions (i.e. meals, telecom or gas for vehicles with a weight of less than 3000 KG). The factors method has been viewed by many as the easy method, but is it really easier to manage? This administrative method is notably described within Memorandum 400-1-2 and 9.4. A rather difficult rule to implement is the one where the factors method can only be used when 90% of an expense report is subject to tax. How to implement this rule? Is there a software set to apply it? What about an expense report with a mixture of GST, HST, no tax, expenses with the factors method and expenses without? If the intent at the time of introduction of the GST in 1991 was to create an easier method to claim tax, 24 years later with 6 provinces with HST rates at 13%, 14% and 15%, e-commerce and employees with different traveling behaviors, the factors method may be more of a headache for several organizations than a simple solution.

At the Accounting Practitioners Symposium that was held in November 2014 across Canada, we presented our online solution on employee expenses; Advataxes. We discussed the limitation of spreadsheets when it comes to handling recoverable GST/HST & QST, as well as the recapture of input tax credits in Ontario and in PEI by large organizations and the rebate by non profit organizations. Another traditional approach to trigger the tax rule; the use of the tax code, is more effective with Accounts Payable than with Employe Expenses since all employees are involved in the posting process of employee expenses and they are rarely all savvy when it comes to current complex Canadian indirect tax rules.

An efficient approach is to let employees select the type of supply (i,e. meal, Km allowance) the jurisdiction (QC, ON, AB, ..) and a transaction date. It is relevant to be efficient when handling Canadian indirect taxes as there are more and more money involved with recoverable taxes with the current trend of provinces harmonizing with the GST and with the planned removal of the recapture of input tax credits (ON & PEI) and the restricted ITR in Quebec. The presentation highlights this topic and it’s als available on the Slideshare icon at the bottom of this page.

About Advataxes

Advataxes is an online accounting software for employee expenses that automates recoverable GST/HST and QST for small, medium and large businesses. Employees can fill out and submit their expense reports to their supervisors from anywhere using their PC, tablet or smartphone in no time. This online software is available in English and French. Advataxes is a product of Ad Valorem.